Oligarchs and oligarchs

Vladimir Putin’s recent interview to the Financial Times has, understandably, attracted lots of attention. (The full text is here). It seemed that everybody felt the need to respond. At times, these responses were odd, as was Donald Tusk’s rebuttal of Putin’s claim that “liberalism is obsolete”. Does the head of the European Council need to respond to every president’s interview even to the parts where the European Union is not mentioned? Many other commentators have focused on Putin’s intentionally insulting comments regarding migrants, “end of multiculturalism” statement, and still on another “end” adduced by Putin, that of Russian oligarchs.

It is with the latter one that I would like to deal. Asked if there are oligarchs in Russia Putin baldly claimed that there were none: “We do not have oligarchs anymore. Oligarchs are those who use their proximity to the authorities to receive super profits. We have large companies, private ones, or with government participation. But I do not know of any large companies that get preferential treatment from being close to the authorities”.

This is of course in manifest contradiction with the facts. The names of the richest Russians are not a secret, and almost all of them are in one or another way linked with the state and often with Putin personally. Caroline Freund in her book “Rich people, poor countries” shows that in 2014, 63% of Russian billionaires’ wealth comes from dubious privatization schemes, mineral resource wealth (which is almost always connected with state-given privileges) and outright political connections. For comparison, the equivalent figure in Latin America is 8.8% and in OECD countries 4.2%.

Thus, factually, Putin’s statement is wrong. Yet, in a different sense, it contains some truth—the truth hidden in the use of the same term “oligarch” for two different types of powerful rich people. This duality between oligarchs and oligarchs was well noticed by Henry Foy in today’s Financial Times, but he fails, in my opinion, to draw the implication of the distinction to its logical conclusion.

The Putin oligarchs are billionaires which “serve” at the discretion of the state. As a Russian commentator once said, they should all consider themselves to be temporary custodians of their wealth. If they fall from grace with the regime they could be stripped of their assets either through dubious legal proceedings, or if needed, more forcefully by being imprisoned.  

The original kind of  Yeltsin-type oligarchs, which “popularized” the term, were different. These oligarchs owned the state—so the state existed only at their discretion. At the peak of their power, after Yeltsin’s reelection in 1996 which they helped him win (in the deal that led to the infamous “loans for shares” trade) oligarchs, separately, controlled Yeltsin and practically most of the levers of state power. Since they also jockeyed for power amongst themselves with some being allied with the military, others controlling natural monopolies, and the third group having their own media, Russia at the end of the 1990s was a country on the verge of a civil war. It stood not so far from where Libya stands today. Under that “regime”, life expectancy fell from 69 to 64.5 years, the largest decline in life expectancy ever recorded in peacetime. It was today’s US opiate crisis multiplied by ten or more.

Russia was a county ruled, to borrow Mancur Olson’s terminology, by roving bandits. What Putin accomplished through reining in of the roving bandit oligarchs was to create a system of stationary bandits whose wealth depends on proximity to the state and who, like every stationary bandit, have more of an interest in the strength of the state and the welfare of its population—simply because such welfare is more closely intertwined with theirs.

It is in that sense that Putin’s oligarchs represent an improvement. Since foreign commentators do not have to live in countries on whose democratic records they expatiate, they are often wont to confound the two types of oligarchs. But for people who have to live under the two alternative regimes (roving or stationary bandits) the choice is rather simple.

It is a choice of living in a state of incipient civil war where you do not know what might happen to your children in school, where you could be randomly beaten up in the street, abducted by different private militias, or evicted from your home by one mafia today and another tomorrow. Indeed, the same things can happen under the centralized kleptocratic regime (such as Putin’s), but there these things happen with certain “logic” and “order”. Differently put, punishment is exacted for political disobedience and the rules of conduct are well known. In the system of disorderly roving bandits, punishment can be meted out randomly, or can be done for entirely different actions or reasons—some of which may displease one baron/bandit but not another. Under that chaotic system, violence can come from any direction, for any reason, and at any time.

To the outside observers, the system of random violence—because foreign observers are exempt from it, as indeed foreigners were exempt during Russia’s “decade of humiliation”—might seem more democratic. There are indeed alternative centers of power in competition with each other, there is freedom of speech, each media empire owned by one baron attacks the media empire owned by another baron, and there thus appears to be a political life despite absence of a rule of law, rampant corruption, and physical insecurity. The system of stationary bandits is monochromatic by comparison but for people who live under it more predictable and much safer.

The truth is that large part of the world’s population has only a choice between these two systems: between multi-original kleptocracy and anarchy, and more centrally controlled enrichment. There is no surprise that most ordinary people will select stability over chaos, predictable violence over random violence, and some administration of justice over none.   

What’s with population density? Economic history speculations

About a year ago I published a paper that looked at historical correlates of inequality.  I used historical data (prior  to World War I for developed countries and prior to World War II for developing countries) from some fifty social tables to calculate inequality statistics. I then ran a regression where for each of these observations, ranging from Athens in year 330 BC to India in 1938, my left-hand side variables were inequality statistics or the inequality extraction ratio (how exploitative was a given society; for the definitions see my paper), and the explanatory variables were things such as GDP per capita, whether the country was a colony or not, urbanization rate, and population density. It turns out that GDP is correlated with inequality statistics but not with the extraction ratios; colonization (not surprisingly) increases both inequality and the extraction ratio. But the most interesting result was for population density. It is associated with both lower inequality and lower extraction. 

         I speculated that there are two ways in which population density can be related to lower extraction ratios (less exploitation by the rich). One way is that higher population density implies a greater threat to an exploitative ruler: he can be more easily overthrown if there are many people in a small area, and thus he might behave in a less extortionary manner. To get the idea, notice that rulers never liked very much to live too close to the possibly restless populace: Louis XIV decamped to Versailles after La Fronde; Russian Czars felt safer in Tsarskoye Selo than in St. Petersburg. 

But an alternative explanation, where the causation runs in the opposite direction, is also possible. Say that, for whatever reason, we have a nice and lenient ruler. Then the extraction ratio goes down, population’s income increases beyond subsistence, and people multiply. Under that scenario, higher population density is the product of lower inequality (and lower extraction ratio) not its cause.

            We’ll  need more research both to confirm the negative correlation between population density and inequality, and even more to tease out the direction of causality. I leave these two possibilities here. I  have no means in telling which one may be more likely. Perhaps both were at work.

            Then, several months ago, in a contiguous but different field of research, Willem Jongman, Jan Jacobs and Goertje M Klein Goldewijk (JJK) published a paper on the biological standard of living in the Roman Empire based on 10,000 skeletal  data. As in the earlier work by Willem Jongman, they found a number of indicators that seemed to suggest that the peak of Roman income was reached in the first century AD. This by itself is not new: quite a few people  have been arguing that. But what was new and puzzling was JJK’s finding that, precisely at the period when incomes were at their peak, skeletal records unambiguously implied that life expectancy (biological standard of living) was at the trough. This is totally different from what we find in modern data: as  countries get richer, people live longer. JJK thought long and hard and decided to argue that the results are not wrong or paradoxical. Roman peak income was correlated with high rates of urbanization. Most of that increased urbanization was due to slaves who were moved from the countryside to the cities such as Rome, Capua, Aquileia etc. In conditions of primitive sanitation and ignorance of the ways to combat infections, high urbanization and high population density meant high mortality rates. Thus, a seemingly paradoxical result: that Roman highest income point was associated with a low biological standard of living. 

            So here we have population density working together with urbanization, and indeed being a proxy for higher incomes, but also for higher mortality rates. If in pre-industrial societies higher population density goes together with higher mortality, then we would expect a sort of cyclical movement where very high population densities would not be sustainable. Premodern societies would not be able to reach very high densities: before it happened, mortality would make sure that density drops down to some lower “equilibrium” level.

            Let us now combine these two results (mine and JJK’s). What do we get? An increase in income leads to higher urbanization rates and greater population density; greater population density reduces inequality, increases incomes of the poor, and enables the poor to multiply; their number of children goes up. But then higher mortality kicks in, and keeps the increase of population in check. What we have is a society of high birth rates (made possible by incomes above subsistence) and high mortality rates. In other words, we get a sort of the Malthusian world where real income of the poor need never fall down to the subsistence level but where the Malthusian-like mechanism of births and deaths keeps the population in check. To break this Malthusian mechanism, we need better sanitation and health.  Exogenous (?) improvements in health become the foundation for modern sustainable growth and lower extraction ratios.

 

            This is all completely conjectural, but is not, I think, unreasonable. We do retrieve in both cases intriguing results for population density but their interpretation as well as a more general model of how population density affects (and is affected by) other variables is missing. A nice area for research.

            Oh, and did I forget to mention Ester Boserup’s idea that high population density increases incomes through easier transmission of technological innovations. Perhaps we should add that too.

Non-exemplary lives

Recently I read, rather by accident than design,  short lives of several contemporary economists. What struck me was their bareness. The lives sounded like CVs. Actually, there was hardly any difference between their CVs and their lives (to the extent that I could tell).

The lives (i.e. CVs) typically went like this. He/she graduated from a very prestigious university as the best in their class; had many offers from equally prestigious universities; became an assistant professor at X, tenured at Y; wrote a seminal paper on Z when he/she was W. Served on one or two government panels. Moved to another prestigious university. Wrote another seminal paper. Then wrote a book. And then…this went on and on. You could create a single template, and just input the name of the author, and the titles of the papers, and perhaps only slight differences in age for each of them.

I was wondering: how can people who had lived such boring lives, mostly in one or two countries, with the knowledge of at most two languages, having read only the literature in one language, having travelled only from one campus to another, and perhaps from one hiking resort to another, have meaningful things to say about social sciences with all their fights, corruption, struggles, wars, betrayals and cheating. Had they been physicists or chemists, it would not matter. You do not have to lead an interesting life in order to understand how atoms move, but perhaps you do need it to understand what moves humans (cf. Vico).

Can you have a boring life and be a first-rate social scientist? To some extent, probably yes. You can be very smart and figure our how people behave under conditions that you have never yourself experienced—nor anyone you know. I cannot say it is impossible. But I think it is unlikely: because it in human nature, however smart we may be, to understand certain things or to look at different and new aspects of an issue, only when we face the problem ourselves. I think that we have all experienced that. Faced theoretically with a given problem, we can provide a perfectly reasonable and coherent answer and even explain well the choices. But then, if faced by the same problem in our own lives, we shall quickly find out that such well-reasoned answer was only partially correct. It failed to take into account a number of secondary issues, many conditions and constraints that, in the abstract case, we either ignored, assumed away, or most likely just never thought about. Or never imagined.

Orderly  and boring lives are a privilege of rich and orderly societies.  We all (perhaps except when we are 25) wish to lead such lives. But they are also very limited lives: the range of emotions and choices that we experience is narrow. We may want to have as our teachers in social science people who had to drink poison to make a point (Socrates), or were jailed and tortured (Machiavelli), or were executed on the orders of a national assembly (Condorcet), or banished and killed by a totalitarian regime (Kondratieff); or those who had to flee their governments and reinvent themselves (Marx), or move into incendiary politics (Weber), or migrate to another language and continent (Schumpeter, Hayek, Kuznets, Leontieff), or experience the thrill of forbidden pleasures (Keynes).

But if our life is a CV, can we understand human choices and human nature—a precondition for being a great social scientist? By asking that question, are we not asking whether well-behaved individuals in orderly and rich societies can really produce breakthroughs in social sciences. Or will their lessons remain circumscribed to orderly and rich societies only and to orderly and boring people, and not carry over to the rest of the world? In other words, to use Plutarch’s term, do we need exemplary lives for greatness in social sciences?